This matter comes before the court on cross motions for summary judgment filed
by the Plaintiff Peoples Exchange Bank (“Bank”) (Doc. 28) and by the Defendant David
E. Bowen (“Bowen”) (Doc. 29). The Bank seeks summary judgment on the only
surviving count of its complaint (the Bank acknowledged on the record in court and by
agreed order that it is not pursuing its 523(a)(2) claims) to determine the
dischargeability of Bowen’s debt owed on a construction loan, in the amount of
$252,448.00, as set forth on the Bank’s proof of claim. The Bank asserts that the debt
is nondischargeable under 11 U.S.C. 523(a)(4), alleging that the debt is one of
defalcation while Bowen was in a fiduciary capacity. Mr. Bowen likewise seeks
summary judgment, arguing that the Bank’s complaint should be dismissed for the lack
of any technical trust as required by cases interpreting 523(a)(4). At a hearing on the
pending motions held July 7, 2006, the parties agreed that the facts are not in dispute
and that the matter turns solely on the court’s interpretation of whether a technical trust
is created by and imposed on Bowen under KRS 376.050. Accordingly,

the court makes the following Findings of Fact, Conclusions of Law and Order.

Findings of Fact

1. On August 22, 2003, the Debtor David Bowen obtained a “Draw Down Line of
Credit” loan from People’s Exchange Bank evidenced by two instruments: A Note in the
maximum principal amount of $242,448.00 at an annual interest rate of 6% and a
Construction Mortgage on Lot #15 of Eagle Trace Subdivision, Clay City, Powell
County, Kentucky, securing the Note’s principal and interest, with an additional $25,000
for additional advances.

2. The purpose of the loan was to provide Bowen with funds necessary to
construct a custom home for resale on the Eagle Trace Estates lot in Clay City,
Kentucky.

3. The Note and Mortgage were recorded on August 29, 2003 in the office of the
Powell County, Kentucky Clerk.

4. Beginning on August 29, 2003, and continuing through March 8, 2004, Mr.
Bowen obtained principal advances on the Note and Mortgage in the amount of
$243,495.93. The Bank did not allow any further advances to Mr. Bowen after March 8,
2004.

4. As of March 8, 2004, Mr. Bowen had made no payments on the loan, as no
payments were due under the terms of the loan until August 21, 2004.

5. According to a Bank Construction Report, as of March 19, 2004, with one
hundred percent (100%) of the loan proceeds having been withdrawn on the
construction draw down loan, only forty five percent (45%) of the house construction
had been completed.

6. After Bowen experienced several construction delays, including the total loss
of his personal residence from a fire in which some construction materials and records
were stored, the Bank declared the Note to be in default on June 4, 2004.

8. The state court action proceeded with the parties engaging in discovery until
Mr. Bowen filed a Chapter 7 bankruptcy petition on September 28, 2005.

9. The Bank initiated this Adversary Proceeding to determine the
dischargeability of the debt owed to it by Mr. Bowen on December 23, 2005, asserting,
among other counts no longer before the court, that Mr. Bowen had committed
defalcation by violating the provisions of KRS 376.050 and that the debt was therefore
not dischargeable in bankruptcy under 523(a)(4).

Conclusions of Law

1. Section 523(a)(4) of the Bankruptcy Code provides that “a discharge under
the Code does not discharge an individual debtor from any debt...for fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The Sixth
Circuit has defined “defalcation” to encompass embezzlement and misappropriation by
a fiduciary, as well as the “failure to properly account for such funds.” Capitol
Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency), 760 F.2d
121,125 (6th Cir. 1985) (citations omitted); see also Kriegish v. Lipan (In re Kriegish),
No. 02-1610, 2004 WL 346041, *2-6 (6th Cir. Feb. 23, 2004).

3. In both Garver and Penick, the Sixth Circuit was careful to narrowly limit the
nondischargeability exception provided for in 523(a)(4) to “only those situations
involving an express or technical trust relationship arising from placement of a specific
res in the hands of a debtor,” Penick, at *5, quoting Garver, 116 F.3d at 180.

4. The Bank’s position is that KRS 376.050 establishes the necessary elements
of a trust relationship between the borrower and the lender in that the funds disbursed
under the terms of the loan agreement are to be used solely for the construction of the
home. KRS 376.050 (2) provides that no person shall willfully misappropriate or
misapply the proceeds received from a loan made for the purpose of, among other
things, erecting a building. KRS 376.990 (1) provides that any person who violates the
provisions of subsection (2) of KRS 376.050 shall be guilty of a Class D felony.

5. Because Mr. Bowen had drawn down all of the proceeds under the loan but
only completed forty five percent (45%) of the home and cannot account for all of the
borrowed funds, the Bank claims he has committed defalcation for purposes of
523(a)(4) and that his debt to the Bank should be determined not dischargeable in
bankruptcy. The Bank further argues that the alleged trust relationship between it and
Mr. Bowen necessary for a viable claim under 523(a)(4) arises by virtue of the statute
KRS 376.050 and the governing documents which came into existence upon execution
thereof.

6. The court finds that the position advocated by the Bank does not fall within
the narrow confines for application of 523(a)(4), as defined by the controlling Sixth
Circuit cases which this court is bound to follow. The relationship between the Bank
and Mr. Bowen is simply one of borrower and lender, and even though Kentucky
statutory law may impose an obligation upon construction borrowers to use the loan
proceeds for the agreed upon purpose of construction, it does not create a technical
trust with a specific res placed in the hands of a borrower who owes a fiduciary duty to
the lender.

ORDER

For the reasons set forth above, and based on the record in this case, including
arguments of counsel, the court hereby finds that the Motion for Summary Judgment of
Peoples Exchange Bank should be OVERRULED and that the Motion for Summary
Judgment of David Bowen should be SUSTAINED. The complaint of Peoples
Exchange Bank is hereby DISMISSED and the debt owed by David Bowen to Peoples
Exchange Bank is subject to the court’s Order of Discharge entered herein on January
20, 2006.